The director for legal affairs of National Iranian Oil Company (NIOC) says buy-back contracts have attracted only 50 billion dollars in investment for Iran’s petroleum industry over 15 years.

Under the best circumstances, the implementation of these contracts over 15 years attracted at most 50 billion dollars for the country’s petroleum industry, while this industry has much higher potentials for attracting investment,” Mahmoud-Reza Firouzmand told Shana in an interview.

Therefore, besides acquiring the necessary experience through this type of contracts, other models of contracts must also be used,” he said.

“Legal and contract experts of NIOC have managed over the past two decades to work out the so-called buy-back model based on the country’s economic conditions and by benefiting from domestic and foreign experiences.

Following practical experiences, this model was revised in different periods of time,” Firouzmand said.

He said more than 100 billion dollars of investment is envisaged to have been attracted by 2015, adding that Iran’s upstream, midstream and downstream sectors are potentially capable of attracting more.

“A small country like Qatar has managed to use more than 200 billion dollars of foreign investment in its oil and gas sectors over the past two decades; therefore, the capacity for attracting investment in Iran’s petroleum industry is much more than this figure,” he said.

Firouzmand said Qatar’s investments have been made mainly in North Dome gas filed, known in Iran as South Pars gas field.

“But South Pars gas field is just one segment of the activity of petroleum industry and such factors as the number of oil and gas fields, necessary infrastructures, specialized and skilled manpower, domestic consumption market and the country’s geopolitical position facilitate attraction of big volume of foreign investments,” he added.

Contract Systems, Effective Tool Firouzmand said contract systems are still the best tool for attraction of investment.

“When the objective is to attract investment in the petroleum industry’s upstream sector, contracting systems are still the main tool and framework for cooperation between oil-rich governments and international oil companies.

Moreover, the attractiveness and transparency of contract frameworks currently in use are in direct proportion with the amount of investment that could be attracted by the petroleum industry,” he added.

“In order to facilitate relations between the outsourcer and the contractor on the one hand, and making these contracts attractive on the other, buy-back contracts have undergone revisions on different occasions.

Due to these studies, we have first-generation, second-generation and third-generation buy-back contracts,” said Firouzmand.

Generations of Buy-Backs Firouzmand said the first generation of buy-back deals focused on development while the second generation focused on exploration and development.

“The first generation of buy-back contracts was designed for short-term presence of foreign contractors with the objective of developing brown fields which required enhanced recovery.

But given the necessity of production from green fields, a new model of buy-back contracts was defined to allow the presence of contractor in both phases of exploration and development.

This model is known as the second-generation buy-back under which the contractor looks for and explores new oil fields with its own costs and if new oil is found at a commercially acceptable level, the contractor was given the preferential right for negotiations and signature of contractor for development.

In case the parties failed to sign a contract for development, NIOC was entitled to negotiate with other applicants for the development of field.

In this case, the Iranian party was obligated to totally recoup the exploration costs to the primary contractor,” Firouzmand said.

The official said third-generation buy-back contracts were also defined because new hydrocarbon reserves were discovered.

“But moving towards the third-generation buy-backs was in response to a major concern of foreign contractors with regards to risks pertaining to unexpected increase in the capital expenditure (capex) throughout development operations,” he said.

“Under the primary buy-back contracts, the contractor was obliged to develop the field and guarantee specific activities to bring the field’s production to a specific level, but any failure to reach that objective could have drastically reduced the profitability of the project for the contractor.

The parties were required to specify the capex ceiling in the contract for reaching that specific level of output and that is why this category is often referred to fixed capex contracts,” said Firouzmand. 

“Therefore, the contractor could not spend more than the fixed amount while for a variety of reason like possible fluctuations in the price of raw materials and uncertainty about reservoir data, estimating capex is impossible and may change throughout the implementation of the project.

In this event, when the necessary costs are lower than the forecasted capex, no problem will occur, but in case reaching the targeted production requires spendings above the agreed ceiling, the contractor is theoretically obligated to pay for the extra costs on his own,” he added.

“To that effect, most international companies engaging in buy-back contracts believe that due to the sharp rise in the oil prices and the subsequent fluctuations, the raw materials’ prices change throughout the execution of the project and go beyond the capex ceiling mentioned in the contract and therefore they have suffered losses.” Firouzmand added: “The developers of the third-generation buy-back deals aimed to reduce this risk and bring the capex ceiling closer to real costs....In other words, more precise and more detailed technical studies are conducted in order to reduce risks emanating from technical uncertainties and heavy fluctuations in the price of raw materials and equipment.That is why these contracts are often referred to as open tender or open capex.”